Adolf W. Gasser v. Minister of National Revenue, [1991] 1 CTC 2134, 91 DTC 170

Sobier, T.C.J.:—The appellant appeals the reassessment by the Minister of National Revenue (the"Minister") of his 1983 and 1984 taxation years whereby the Minister

(i) disallowed the appellants claim for deduction in 1983 as a business investment loss of the $42,471.52,

(ii) included in the appellants income, the amounts of $610.14 and $4,226.78 as automobile benefits pursuant to subsections 15(1) and (5) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), and

(iii) included in the appellants income amounts of $4,662.50 and $4,199.37 under subsection 15(1) of the Act for loan payments made by 493900 Ontario Ltd. (" Forma corporation") to Brigden Credit Union.

The appeals deal with the appellants relationship in 1983 and 1984 with two corporations of which he was a shareholder: Forma corporation and 494101 Ontario Ltd. (Alpen Haus").

The evidence was sketchy as to the business carried on by Forma corporation but it appeared to have been the business previously carried on by the appellant and his wife in a partnership known as Forma Cosmetics C Forma partnership”).

The business carried on by Alpen Haus was a restaurant business.

The three issues will be dealt with separately.

(1) The Business Investment Loss

The appellants evidence was that in April 1981, he personally acquired the business and assets of what later became the business of Alpen Haus. The appellant produced an unsigned agreement of purchase and sale dated April 23, 1981 between the vendors and what appears to be Forma partnership but had at the execution page below the place for signature by the purchaser, the following:

Forma Cosmetics

Per: Dolf Gasser, Sole Proprietor".

Mr. Gasser testified that notwithstanding the form of the agreement, he alone was the purchaser.

The following is an excerpt from the agreement of purchase and sale:

Whereas the Vendors have agreed to sell to the Purchaser and the Purchaser has agreed to purchase from the Vendors upon the terms and conditions hereinafter mentioned, All And Singular that certain parcel or tract of land situate, lying and being in the City of Sarnia, in the County of Lambton, and Province ofOntario, and being composed of the ground floor and basement of the building situate on part of Lot 13, on the corner of Lochiel and Christina Streets, and known as 188 North Christina Street, and the ground floor and basement of the building.

And Whereas the Vendors have agreed to sell and the Purchaser has agreed to purchase this property at and for the total consideration of Thirty-One Thousand

($31,000) Dollars, (receipt of which is hereby acknowledged by the vendors herein)

And Whereas the Vendors hereby agree to assign their right and interest under a Lease between themselves and District Development Corporation Limited, and dated the 24th day of August, 1979.

Although the oral evidence was that Mr. Gasser personally purchased the equipment, the excerpt above deals with the purchase of real estate known as a portion of 188 North Christina Street, Sarnia, Ontario. In addition, the excerpt talks of an assignment of lease. Page 2 of the agreement deals with a Liquor Control Board of Ontario liquor licence application and adjustments to the purchase price but also goes on to say: "And the vendors further hereby covenant that they are the sole owners of all equipment transferred under this agreement and there are no liens or encumbrances against same."

There is an equipment schedule attached to the agreement which states that: "The following equipment is included in the purchase price in this Agreement". A list of restaurant equipment follows.

Mr. Gasser stated that in October 1981, he rolled the assets over to Alpen Haus and was owed some money by Alpen Haus as part of the purchase price for rollover: He believed it was between $30,000 to $34,000. No evidence was adduced as to how this rollover took place. No agreements were produced to substantiate the claim. Mr. Gasser gives as the reason for this and as a reason for not being able to produce other documents the fact that he defaulted under the restaurant lease, the landlord "changed the locks” and therefore he was unable to retrieve any documents which were kept on the premises.

In paragraph 5 of the notice of appeal, the landlord referred to as Exxar; however, the agreement of purchase and sale refers to an assignment by the vendors of their rights under a lease between themselves and District Development Corporation Ltd. There was no explanation as to this difference.

Mr. Gasser did produce two other documents. One document was a copy of an accounting ledger sheet headed "Note Payable-Shareholder". Mr. Gasser stated that this was prepared by an accountant, Mr. John Schnurr. The ledger sheet has an opening balance for January 1, 1982 of $34,365. There are debits and credits for 1982 shown but no explanation as to what they are, except that there was reference to “ Russell Street" with entries showing a $17,972.25 credit probably according to Mr. Gasser on the purchase of this property on Russell Street and a debit of $22,000 probably on its sale. These amounts were included in the running balance so that at the end of 1982, $42,471.52 was showing as owing to Mr. Gasser. The amount of $42,471.52 was the amount claimed by the appellant as a business investment loss.

Mr. Gasser assumed that the opening balance on the ledger of $34,365 was the amount owed to him on the rollover. No note was produced in support of this amount and Mr. Gasser stated that he did not recall having received a note.

Mr. Gasser also produced an unaudited balance sheet for Alpen Haus restaurant as at December 31, 1981 being a time after the rollover showing equipment at $20,500. This, Mr. Gasser claims represents the equipment purchased less goodwill not shown. The balance sheet also shows leasehold improvements of $15,000 which he claims were personally paid for by him after he acquired the assets but before the rollover. This post-rollover balance sheet speaks of Proprietors Equity of $6,998.22 being the difference between the assets and the liabilities. There is no mention of paid-up capital or surplus.

What the Court had before it was an unsigned agreement of purchase and sale stating the purchase price to be $31,000 as at April 23, 1981; an unidentified copy of a ledger sheet showing an opening balance of a note owing to a shareholder at January 1, 1982 of $34,365, and a balance sheet as at December 31, 1981 not showing any amount payable to Mr. Gasser on the liability side, only showing loss on operations of $27,376.78 and accounts payable of $2,700. We also have Mr. Gasser's evidence that he believes he was owed between $31,000 and $34,000 on the rollover.

As a result of failure to pay rent in March 1983, the landlord of Alpen Haus effectively put Alpen Haus out of business. This made the amounts owing by Alpen Haus to Mr. Gasser uncollectible.

The issue is therefore, was the amount of the loss, if it can be determined, deductible by Mr. Gasser as a business investment loss under subsections 50(1) and 39(1) of the Act?

The onus of rebutting the Minister's reassessment lies with the appellant. He must adduce evidence that the Minister's reassessment was incorrect.

Counsel for the appellant referred to Fritz v. M.N.R., [1985] 2 C.T.C. 2185; 85 D.T.C. 507 (T.C.C.) where the appellant received a note for $110,248 as part of the consideration for the rollover under section 85 of the Act. The company's banker insisted that the appellant write off $81,000 of this note which he did in 1978. In Fritz, Goetz, T.C.J. permitted the deduction as a bad debt. However, there, His Honour was faced with amounts which were ascertainable, i.e., the amount of the note and the amount of the write-off. Here we do not know the amount of the debt and accordingly, we do not know the amount of the writeoff. The Court is asked to choose an amount from a menu of amounts. In Fritz, Goetz, T.C.J. determined that there was a note. In this case, the Court does not know what form the indebtedness took even if it knew the amount.

Counsel for the Minister referred to Toolsie v. M.N.R., [1980] C.T.C. 2239; 80 D.T.C. 1209 (T.R.B.) in dealing with the question of evidence required to prove an appellant's case. Hon. L.J. Cardin, P.C.Q.C. Chairman, as he then was, stated at 2241-42 (D.T.C. 1211-12) the following with respect to the onus placed on an appellant.

The appellant seemed to underestimate what was required of him in order to be successful in refuting the Minister's assumptions. The appellant simply denied the Minister's allegation without producing proper evidence of the source and the application of the borrowed funds. Without that information the Board simply cannot conclude how and where the borrowed funds were used. It was counsel's contention that the evidence given by the appellant was credible and should be accepted by the Board.

The Board gives the credibility of witnesses due consideration. However, when the personal testimony of an appellant comes in conflict with the Minister's allegations which are based on plausible grounds, the Board must have supporting evidece of the appellant's word in order to conclude that the appellant has effectively refuted the Minister's allegation and has succeeded in satisfying the onus which is on him. This the appellant failed to do. He did not submit to the Board any hard evidence which might have proven the Minister's assumptions wrong.

The Court was urged by the appellant's counsel to find that the appellant was a credible witness and believe him. The Court does not doubt the appel- lant’s credibility but without more he cannot succeed. He has not even been able to establish the amount owed to him. He simply did not know, or could not remember what was owed, or how it was evidenced. On this part of the appeal, the appellant has not discharged the onus and accordingly that portion of the appeal is dismissed.

(2) Automobile Expenses

The automobile used by Mr. Gasser was owned by Forma corporation. He claims he used it 99 per cent of the time for business purposes; yet he kept no logs as to business use versus personal use and goes so far as to admit that he considers driving the automobile in question from his home to Forma corporation's office as business use. Again Mr. Gasser has failed to dislodge the Minister's reassessment that the costs of such travel were his personal or living expenses. Accordingly,that part of the appeal dealing with the conferring of a benefit to him of a value equal to $610.14 and $4,226.78 in the 1983 and 1984 taxation years respectively is also dismissed.

(3) Interest Expense

The last part of this appeal deals with the Minister's reassessment of the appellant by including in his income $4,662.50 and $4,199.37 for the taxation years 1983 and 1984 respectively. These amounts were paid by Forma corporation to Brigden Credit Union Brigden"). It is the Minister's assumption that these amounts were paid by Forma corporation on account of the appellant's indebtedness to Brigden and not on account of its own indebtedness.

As a result of a fire in 1977, the premises known as 228 Front Street, Sarnia, Ontario, owned by the appellant, were damaged and the appellant borrowed approximately $35,000 from Brigden. Although originally he claimed that all of the money was used to pay for repairs to the damage caused by the fire, Mr. Gasser recalled later that perhaps $3,000 might have been used to purchase a truck.

Prior to the fire and after the repairs, the premises were used by Forma partnership as its place of business. It was Mr. Gasser's evidence that although he borrowed the money personally, Forma partnership made all payments on the Brigden loan from 1977 to 1981 when Forma corporation was incorporated. At this point Forma corporation was using the premises and took over the payments on the Brigden loan. It is these amounts paid in 1983 and 1984 which are in issue. At the outset, there is no issue of any benefit being conferred on Mr. Gasser for the years 1977 to 1981 during which Forma partnership made the payments or for the balance of 1981 and all of 1982 when Forma corporation appears to have made the payments. The building was sold in 1983 and Forma corporation continued to make the payments during 1983 and 1984. There is no dispute that the liability under the loan was and remained at all material times that of Mr. Gasser.

Although Forma corporation came into existence in 1981, there was no evidence that it acquired the assets or business of Forma partnership or that it assumed any liabilities of the appellant or Forma partnership. It is the appellant's position that Forma corporation merely carried on and continued what Forma partnership had been doing in the past; i.e., making the loan payments. However, no evidence was adduced to indicate in any way how Forma corporation came to be legally obligated to pay indebtedness originally incurred by the appellant, without more the Minister's reassessment stands.

Accordingly on the third issue, the appellant fails and this appeal is also dismissed.

Appeal dismissed.